Think the Fed might ease soon?

Think again. Bernanke has made it clear that he considers inflation expectations more important than actual inflation, core or otherwise. In the consumer confidence release this morning, inflation expectations jumped. Consumers expect 5.5% inflation over the next 12 months. That reading is up sharply from 5.1% in April and the highest since last August.

A couple of interesting pieces this weekend. The NYT confirms what many have suspected about the distortions being introduced into the monthly employment statistics by the “birth-death” model. “Wait A Few Months Before You Believe The Numbers” says the NYT. John Mauldin’s weekly newsletter is meatier than usual and talks about the mortgage market. “Overexposed and Overrated“, says John.

“As of last week, the Market Climate for stocks remained characterized by unfavorable valuations, moderately favorable price trends, and a combination of overvalued, overbought, overbullish, rising-yield conditions that has historically produced not only returns below Treasury bills, on average, but deep, abrupt “panic” declines. As always, that’s not a forecast or an outcome that we need to rely upon – average returns below Treasury bills are sufficient reason to hedge our market exposure – but we certainly shouldn’t rule out such a panic.” - John Hussman.

The Big Picture shows some interesting data from the St. Louis Fed., which are consistent with an approaching recession.

“The WLI is showing broad-based strength in its forward-looking components, including those for the services and industrial sectors. Therefore, the prospect of a recession is minuscule at this point,” says Lakshman Achuthan, managing director at ECRI.

Is minuscule different from zero?

Paul Kasriel says: “I am not aware that any recession has been predicted by a consensus of economic prognosticators. Two reliable recession indicators are now flashing a warning signal and private domestic demand is showing weakness. Maybe it’s different this time? Perhaps it isn’t. Only the National Bureau of Economic Research will know for sure.”

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy.

The chart speaks for itself, I think. From MaoXian’s blog, this chart shows the dollar turnover in Shanghai A-shares.

A speculative blowoff like this typical ends with exhaustion and panic. Unfortunately, how high? is an unanswerable question. We will only know after the fact. But the parabolic nature of the curve - ever steepening - says that it can’t go much longer. Trees don’t grow to the sky.

Event risk is part of any investment. It is the risk that something unforseen might happen. Does the Shanghai market represent event risk for the US markets? February 27 says yes, it might well. A momentary break in Shanghai caused a momentary break in the US. Perhaps a second break will be dismissed after the first turned out to have no lasting effect. There’s no way to know. But I think ignoring this risk is probably not the smartest thing to do. Clearly the Chinese authorities have got themselves between a rock and a hard place. If they crack down on the speculation there will be a panic as the amateur speculators rush for the door. If they don’t the crash will be worse later. This is an accident looking for a time to happen.

The exuberance over yesterday’s apparent gains in new SFR (”home” - see below) sales won’t last. The same thing happened in April last year, and the gains were revised away. These will be, too, and remember they don’t take cancellations into account. I guarantee it, as the Men’s Wearhouse guy says. The report on existing SFR sales today was more sobering, although it, too, considering the time lag between transaction and closing, probably still doesn’t reflect the real-time situation in mortgage finance. Even so, sales fell more than expected and reported prices have now been falling for nine months in a row. The inventory of SFRs for sale rose 10% in a single month (to a new all-time high) while the months supply spiked to 8.4 months. I see no reason to believe the trajectory has changed at all.

The use of the word “home” is real estate sales-speak for a single-family residence (SFR). A SFR may or may not be a home. It is only a home if someone makes it their home. Otherwise it is just a piece of property - land and structure. Real estate sellers like to use “home”, well because everybody needs a home, don’t they? And it has all kinds of positive connotations. Cynical. I try not to get caught up in the thought control. Right now there are a heck of a lot more SFRs out there than homes.